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The OCC has just taken another step toward a national fintech charter.

Today it released a draft of the licensing manual supplement that will be used by fintech companies digital currency and blockchain companies among them to understand and engage in the process of becoming a chartered special purpose national bank (often called a Fintech Charter).

The draft manual echos and clarifies previous statements from the OCC specifying that they have legal authority to charter a company that merely provides access to a payment system (even if it doesn't take deposits or make loans). The draft manual reads:

a special purpose national bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking activities: taking deposits, paying checks, or lending money.

And then, as we've asked for in previous letters, it goes on to elaborate on what paying checks means in the modern world:

issuing debit cards or engaging in other means of facilitating payments electronically may be considered the modern equivalent of paying checks.

The draft manual also delves into a topic we focused on in our most recent comment letter: under existing interpretation and law is there a broad category of bank-permissible activities which could be used to describe the range of activities in which digital currency companies engage? The OCC helpfully points a perspective applicant in the right direction through a succession of footnote references to past interpretations (the same past laws and interpretations we described in our most recent comment). These include:

buying and selling exchange, coin, and bullion [12 USC 24]

which is one possible route for appraising the purchase or sale of digital currency to customers as a bank-permissible activity. The manual also describes:

establishing and operating a messenger service (12 CFR 7.1012), acting as a finder (12 CFR 7.1002)

which is a pretty good description of running a full node or a lightning node. It also cites:

acting as a finder (12 CFR 7.1002),

which is what a digital currency exchange is doing when it connects buyers and sellers on their platform. It also cites:

producing and selling software that performs a service the bank could perform directly (12 CFR 7.5006).

which is a great match for hosted wallet design and services, e.g. a high tech version of safekeeping activities banks have provided for centuries in the form of safe deposit boxes and other custodial services.

We're thrilled that the OCC is making this process as transparent as possible, and even doing a bit of hand-holding to help innovators (who are better versed in bits than bonds) understand and navigate the chartering process.

If you’d like to read more about how a charter may be relevant to digital currency companies take a look at our most recent letter to the OCC. And look out for our next comment! Even though licensing manuals are not usually subject to a public comment process, the OCC has asked for continued feedback from the community.

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Several members of Congress have sent a letter to the IRS calling for cryptocurrency tax clarity.

Today's letter, published by House Ways and Means Committee Chairman Kevin Brady, calls on the agency to “expeditiously issue more robust guidance clarifying taxpayers’ obligations when using virtual currencies.” It is a follow-up to a letter published in 2017.

These letters echo Coin Center’s calls for greater clarity and guidance around the tax treatment of cryptocurrencies. Right now, American cryptocurrency users who want to pay their taxes simply don’t know how to do so properly. This gray area is not only frustrating, but can also create serious liabilities for well-meaning citizens.

The 2017 letter goes on to ask for more information about the rationale behind the IRS’s 2017 John Doe summons for Coinbase user data, which we believe is an overly broadfishing expedition.

We were also pleased to see them ask if the agency will consider a de minimis exemption for small transactional use of cryptocurrencies, which we called for in April of last year. Currently, a user needs to calculate capital gains on every stick of gum they buy with cryptocurrency. That doesn’t make sense. The Cryptocurrency Tax Fairness Act, introduced last year, would address this issue.

We are glad to see Congress take action–there are clearly many open questions surrounding taxation of cryptocurrencies. It’s promising to see members of Congress step up to call for a more welcoming environment for these new technologies.

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The Comptroller of the Currency is making the case for a Federal Fintech Charter, a welcome alternative to state-by-state licensing for cryptocurrency and other payments companies.

In a recent op-ed, Comptroller Otting rightly celebrates competition between state and federal regulators and describes the existing dual banking system:

“Since 1863, the United States has benefited from a dual banking system in which companies seeking to conduct the business of banking can choose to operate via state licenses and charters or apply for federal charters and operate nationwide.”

A shortcoming of the dual banking system, as we see it, is that while there are both state and federal options for traditional deposit-taking banks, payments companies who don’t take deposits (cryptocurrency exchanges among them) generally only have one option: state regulation through money transmission licensing. Why, we’ve asked on several occasions, isn’t there a federal regulatory alternative for money transmitters as there is for regular banks?

The OCC’s fintech charter could be that alternative. It would allow a financial services company to become federally regulated as long as it performs any one of the three core banking functions described in the National Bank Act: deposit-taking, lending, or check-cashing (or as the kids these days call it, payments).

Moreover, as we’ve written in our comments submitted to the OCC Fintech Charter proceedings, companies that facilitate payments in cryptocurrency should also be eligible for federal charters just like the Paypals or Venmos of the world.

Today, the Comptroller echoed that sentiment, suggesting that there should be a Federal analog to New York’s recent decision to regulate Gemini and Itbit’s issuance of dollar-backed tokens. We’re thrilled that the federal charter effort is alive and kicking and that the Comptroller is excited for his agency to play a role promoting innovation in the cryptocurrency space.

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The Federal Reserve of St. Louis has published an excellent paper on payment systems and privacy.

Research Fellow Charles Kahn explains why financial privacy is important irrespective of concerns over illicit transactions, and how privacy is being actively eroded as electronic payment systems replace anonymous cash.

Not all of the privacy provided by cash is bad, and if cash disappears we will need new ways of providing that privacy. Because privacy needs are different in type and degree, we should expect a variety of platforms to emerge for specific purposes, and we should expect continued competition between traditional and start-up providers.

He goes on to offer two reasons why the private sector may be better poised to provide future cashless payment privacy than the government: technical expertise and trustworthiness.

First, it's hard to argue that the central bank will have greater technical skills in protecting privacy (at least in retail transactions; wholesale and infrastructure may be a closer call). The standard regulatory arguments for oversight of payments systems apply, however: There is an easy case for a regulator to be in charge of setting and harmonizing standards for privacy protection.

On the issue of trustworthiness, the answer is more difficult: … Every twist and turn in politics provides an opportunity to justify an examination of one or another aspect of individuals' transactions. And it is not clear in the current political environment that a central bank or a payments authority will be any stronger at pushing back on these intrusions than private institutions are.

Nor will transparency solve the problem. Paper money is transparent: The technology eliminates the ability of the issuer to monitor transactions, and "it is a truth universally acknowledged" that paper money does so. No computer technology can have this degree of confidence. Only an infinitesimal proportion of people on this planet can verify that computer code does what it advertises it does and only what it advertises. To believe that the CIA has imprinted paper currency with a technology enabling it to report hand-to-hand transactions is paranoia. To believe that spy agencies have backdoors to common computer programs is last week's news. Generating trust in the privacy promises of a public payments authority's new electronic money will be an extremely tall order.

He's also understandably wary of the trustworthiness of private sector payments providers given the lucrative incentives behind customer data collection and monetization. In light of that unfortunate reality, he offers an optimistic balance-of-powers prognosis for privacy:

All institutions, public or private, are likely to be untrustworthy—they are just going to be untrustworthy in different ways. Citizens are not really interested in an absolute guarantee of privacy; we simply want it to be sufficiently difficult to violate privacy that it can be done only in a publicly observed and generally agreed way. Using the differences in objectives of the private and public spheres becomes, it seems to me, a way of making this tension work for us: Public regulation with pushback by private providers seems to me the more hopeful formula.

That's a reasonable approach, but it also points to an alternative. Rather than looking for trustworthy institutions or pitting one untrustworthy institution against another, perhaps we can use open source software development and open blockchains to build private payment systems that don't require trustworthy administrators at all! This, it seems to me, is one way to describe the goal of privacy-protecting cryptocurrency projects like Zcash, Monero, and Grin, and it's why we at Coin Center are so keen on promoting a regulatory climate that does not deny these new technologies the room they need to grow into robust cash alternatives.

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SEC refusal to allow exchange to list Winkelvoss ETP “Dampens Innovation,” according to SEC Commissioner Hester Peirce.

The SEC rejected a request to allow the BZX Exchange to list and trade shared of the Winkelvoss Bitcoin Trust, a Bitcoin based Exchange-Traded Product (ETP). In order to allow the exchange to list the ETP, the SEC would have had to approve a rule change. The SEC refused to do so, largely because they felt that the BZX Exchange did not have sufficient safeguards in place to prevent market manipulation.

In her dissent from the decision, Commissioner Hester Peirce laid out the flaws in the SEC’s reasoning, and shone a light on the challenge to innovation that this decision poses:

By suggesting that bitcoin, as a novel financial product based on a novel technology that is traded on a non-traditional market, cannot be the basis of an ETP, the Commission signals an aversion to innovation that may convince entrepreneurs that they should take their ingenuity to other sectors of our economy, or to foreign markets, where their talents will be welcomed with more enthusiasm.

To support her point, Peirce lists some of the many benefits that decentralized cryptocurrencies offer:

For example, trading in bitcoin is electronic, which facilitates competition and price transparency. Bitcoin are interchangeable, so that a purchaser is sure to get exactly the same thing no matter where she purchases it. In addition, bitcoin mining is not geographically limited (except to the extent it migrates to places with cheap electricity), so it is not subject to geopolitical threats that plague other commodity markets.

Peirce voices serious concerns about the discord between the SEC’s actions and its mission. She warns that with this decision, the SEC has positioned itself as the “gatekeeper of innovation,” which, in Peirce’s view, is a role that “securities regulators are ill-equipped to fill.” Peirce argues that investors in the cryptocurrency space tend to have far more sophisticated knowledge of the technology and should be left to decide for themselves whether they wish to invest. She concludes by asserting that the SEC has overstepped its boundaries and is acting in interests contrary to the ones it was founded to protect:

I reject the role of gatekeeper of innovation—a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets Accordingly, I dissent.

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Despite criticisms, Fed agrees it won’t regulate cryptocurrency.

Last week, Federal Reserve Chairman Jerome Powell testified before the House Financial Services Committee, and while reports of his remarks on cryptocurrency have focused on his narrow and negative views of the technology, we think the real news is that he stated that the Fed doesn’t have jurisdiction over cryptocurrencies and isn’t seeking to provide oversight.

An exchange between Powell and Rep. Patrick McHenry, who understands cryptocurrency, basically restates Coin Center’s recent explainer on crypto and monetary policy: “Cryptocurrencies hold much promise to expand the range of monetary options available to all classes of people and secure a degree of security and liberty not offered by some of the world’s government-backed currencies. They currently exist in a small and experimental corner of the world’s financial markets, and are therefore unable to restrain central bank’s monetary policy levers.”

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Experts weigh in the the state of cryptocurrency regulation.

At a recent event hosted by Andreessen Horowitz and #Angels, Coin Center Senior Policy Counsel Robin Weisman joined former federal prosecutor and now lead of a16z’s crypto fund Kathryn Haun on stage to talk through recent movements in cryptocurrency policy and the effect they may have on the development of this technology.

The session was recorded. Listen here:

(Photo courtesy of @beLaura on Twitter)

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A top SEC official said that Ether is not a security.

Speaking today at a conference, the U.S. Securities and Exchange Commission’s Director of Corporate Finance, William Hinman, revealed in a speech that the SEC does not consider Ether, the Ethereum network’s native cryptocurrency, to be a security:

"Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions."

We are glad the SEC agrees with our long held analysis of how securities law applies to decentralized cryptocurrency networks like Bitcoin and Ethereum (See, in particular, our analysis of Ethereum here). We are thrilled to see it take strong pro-innovation approach to this nascent technology. With this guidance, the SEC is showing that taking a pro-innovation approach does not have to come at the expense of protecting investors.

Director Hinman’s analysis was based on an appreciation for the nuances of how decentralized technology really works, something we laid out years ago in our framework for securities regulation of cryptocurrencies. He used his speech to explain the Howey Test for determining whether a financial instrument is an investment contract and concluded that his analysis was that Ethereum failed the Howey test and, therefore, could not be considered a security:

When the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. ... the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.

It is a very good day for US policy toward the technology of innovation.

For more information on Ethereum, please see this explanation written by Ethereum’s founder, Vitalik Buterin, on Coin Center’s website: What is Ethereum?

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Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permissionless blockchain technologies.